European Investment Bank (EIB)’s €100 million (US$118.4 million) two-year bond represents the market’s first multidealer-led primary issuance of digitally native tokens using public blockchain technology. EIB believes the digitalisation of capital markets may bring significant benefits in future, including reduction of intermediary and other fixed costs, enhanced transparency of trading flows and identity of asset owners, and faster settlement time.

Richard Teichmeister, head of funding, new products and structured transactions at EIB in Luxembourg, says the genesis for the bank to go down the blockchain-bond route was to replicate, as much as possible, a “normal” debt capital markets transaction.

EIB’s deal, Teichmeister argues, is the first blockchain bond to incorporate many features inherent to benchmark transactions: a syndicate of banks underwriting and lead managing the transaction, targeting an unlimited number of investors or nonaffiliated investors, and the size and maturity of the transaction being meaningful and in line with the borrower’s typical issuance.

Teichmeister says EIB designed the product to appeal to the widest group of investors. “We landed with a structure that, from an investor point of view, is ‘plug and play’. The investor should not be burdened with too cumbersome technical requirements. Our blockchain deal has raised awareness of the technology for a lot of investors. We have triggered the process to allow future market development.”

In a partnership with Banque de France, the deal also used central-bank digital currency (CBDC). EIB issued bond tokens on the Ethereum blockchain, where investors purchased and paid for the security tokens using traditional currency.

The lead managers settled using a representation of central money – the CBDC.Though the CBDC was exchanged immediately for fiat currency, as regulations do not allow the overnight existence of CBDC in the euro area, Teichmeister says it was a major achievement for distributed ledger technology in capital markets.

But he adds that it is also the biggest roadblock to further development. “The difficulty to merge the distribution of the bond tokens against receipt of digital currency will have to be improved so the potential efficiency gains blockchain technology presents when it works at its best can be fully exploited.”

The regulatory hurdles for this are numerous, but Teichmeister says EIB is taking investor feedback on board as it works on its next steps in blockchain technology.